Short excerpt from a YouTube video by Craig Wear, CFP® explaining the rationale and mechanics for paying taxes now on previously tax-deferred accounts to avoid higher taxes later, converting funds into a tax-free state. The speaker notes that if taxes are paid from the account itself and cash isn't already liquid (money market/cash), assets must be liquidated to cover the tax bill.
So what you've just done is you've taken money that's going to be that you've had tax deferred for all these years, you've decided that now's the time that you should pay tax on it so that you avoid paying a lot more tax later. And it ends up in a totally tax free state, which is a beautiful thing. The process is really simple. And if you're going to pay taxes from within the account, then you have to. If the cash to pay the taxes is not already sitting in a money market or cash account, then you have to liquidate something in order to pay the taxes to get it done.
